Institutional Insights: Barcalys FX Thoughts For The Week Ahead

Thoughts for the Week Ahead VaR-ying volatility - By using a stylized VaR analysis, we illustrate that the extreme moves in equities globally, and the accompanying surge in implied volatility, might have forced investment managers to reduce risk indiscriminately across assets, including FX. If portfolio managers were indeed driven to unwind FX positions due to risk limit considerations, the more “popular” trades should see larger under performances, in our view. The past week’s FX performance, examined in conjunction with positioning indicators and options pricing, provides some evidence of such behaviour...
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Institutional Insights: Morgan Stanley FX Pulse

USD Stable Amid a Downtrend - The return of vol. The recent price action reminds us that economic activity is not necessarily immune to asset volatility, as seen in the aftermath of the 1987 stock market crash, for example. Global reflation, combined with USD weakness, created ideal liquidity conditions for pushing volatility to record lows, aided by short-vol yield-enhancement strategies. Risk parity funds compounded this problem by simultaneously adding to bond and stock positions. Thus, a vol spike was unleashed as US rates rose, leading to a decline in the equity risk premium, as investors reassessed the capital market outlook...
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